The hungry agroindustrial complex country

19.04.2010 — Analysis

In the spring of 2010 the agrarians have encountered yet another disaster. Traditionally the money for the sowing season would come through the sales of the previous year's harvest. However, this time about 13% out of the 5.3 million tons of the Urals grain has not been sold. According to the data from the regional ministries and the agroindustrial complex departments the Kurgan Oblast can't sell more than 500 thousand tons of grain, Chelyabinsk about 100 thousand tons, and Sverdlovsk about 60 thousand tons. As a result millions of roubles invested into the previous year's harvest have not returned into the turnover of agroindustrial enterprises.

Hopes on thin legs

The difficulties with sales of grain came up due to the fact that in the autumn 2009 - spring 2010 when in Russia the State purchase interventions traditionally happen, prices for wheat have started to fall.

On average the Urals agrarians spent 4.1-4.5 thousand roubles for the production of a ton of grain. Prior to the start of interventions they hoped to sell it for 5 thousand roubles per ton. However, market prices fluctuated between 2.8 and 4.5 thousand roubles. These prices were unprofitable for the majority of agroindustrial enterprises. Pyotr Sumin, the Governor of the Chelyabinsk Oblast, in the beginning of this year has even written an official letter to Yelena Skrynnik, the Agriculture Minister of Russia. In this letter he demanded the consideration to stop auctions if the purchase price fell below the average production cost of wheat.

Now some of the farmers are still literally sitting on grain sacks, having not returned the money spent on the production of the grain. Those who nevertheless decided to sell their products, obtained minimal profits. The Ministry for Agriculture of the Chelyabinsk Oblast informed RusBusinessNews that the profitability of plant breeding companies in 2009 has dropped ten times in comparison to 2008. Having spent 4 billion roubles in 2008 agrarians got 5 billion, while in 2009 - only 4.16 billion roubles. The press service of the Governor of the Kurgan Oblast informed RusBusinessNews that according to the results of sales of grain in 2009 the agrarians have made about 289 million roubles; the profit from each sold ton amounted to about 300 roubles. In 2008 the profitability of companies was 4 times higher.

Relatively high revenues in 2008 were due to the high volumes of the investment from the State. According to the data provided by the Ministry for Agriculture of Russia from August 2008 to May 2009 a record 9.63 million tons of grain have been purchased. However, for the most part it has not been sold and the State coffers still have the unsold remains. As a result for the State-funded investments in 2009-2010 9.5 billion roubles has been invested, which is 5 times lower than a year before. However, regardless of the reduction of funding and the volume of purchased grain the agrarians en mass not just retained the current production volumes but even increased them in some regions. According to the data provided by the Ministry for Agriculture of Russia in 2008 the cultivation area of wheat in the country as a whole has been increased from 26.6 million hectares to 28.7 million, in the Urals Federal District from 2.4 to 2.6 million. In the Urals Federal District the harvest of 2009 was 4% higher than in 2008.

The two percent profitability of 2009 has not just killed all the plans for modernisation and development of plant breeding companies but has put them on the brink of extinction. On the background of the dropping prices for the harvest, starting in early 2010 the cost of utilities (electricity, heating, water) has not grown by 12-15% as expected but by 40%. According to Vladimir Aleksandrov, the Chairman of the South Urals SKhPK, in 2002 the costs of the electricity amounted to 1% of company spending. In 2009 this has grown to 5%. "This year, according to January-February bills the spending on electricity will amount to 10-15% of the total spending for the production of agricultural products. They will exceed the total of spending on fuel, spare parts, mineral fertilisers, and taxes", pointed out Mr Aleksandrov. According to the 2009 figures the growth of energy tariffs in the Chelyabinsk Oblast, for instance, amounted to 80%.

The prices for fuel and fertilisers are not standing still either. Ivan Feklin, the Minister for Agriculture of the Chelyabinsk Oblast, informed RusBusinessNews that from 2009 the cost of oil and lubricants has grown by 16-25.5%. Prices for fertilisers in the first 3 months of 2010 in the South Urals have gone up by 7-12%. In the Tyumen Oblast - by 30%. According to Dmitry Koshelev, the Manager of the Sales Department of Tyumenagrochim Ltd., in December 2009 saltpetre fertilizer was sold at 12 thousand roubles per ton, in the end of March 2010 it was shipped from a warehouse in Tyumen at 15.1 thousand roubles.

Rouble to the rescue

In order to prepare and carry out of the sowing season 2010 the Russian agrarians would need 151 billion roubles, according to the data provided by the country's Ministry for Agriculture. According to the calculations of the Department for the Agroindustrial Complex of the Tyumen Oblast, the countryside of the region would need 2.5 billion. The Chelyabinsk Agroindustrial Complex would need about 4 billion.

The sowing season in the Urals Federal District starts in the end of April - beginning of May. At the end of March less than a half of necessary fertiliser and fuel has been purchased, the agrarians simply had not had enough money to stockpile any reserves. The lack of demand, in its term, has led to the upset in work of fuel and chemicals companies. For instance, a representative of one of the Urals companies supplying fertilisers told us that the company can't hold on to the raw material for the Urals agrarians at a relatively low price for longer than a few days after which it will be sold to other regions where there is some demand.

In order to liven up the Agroindustrial Complex prior to the sowing season the Government has been forced to start giving the regions subsidies for the agro producers 2 months earlier. By 12 April 25 billion roubles has been allocated. At the same time banks have given the agroindustrial companies more than 60 billion of short term loans. However, many financial structures due to the difficult situation in the agroindustrial complex either decided to stop working with the agrarians or presented them with prohibitive conditions. For instance these are high interest and inadequate valuation of collaterals. As a result many companies are practically cut off from borrowed resources. "Fuel at concessional prices, at 10% discount compared to market value is sold under the condition of 100% of advanced payment. Due to the lack of turnover resources the agrarians have to come to banks for loans to buy fuel. The latter do not willingly give loans to the producers of agro products. Only 188.5 million credited roubles has been issued to the South Urals agrarians for the field work as of today. This is 92 million less than last year", pointed out the Chelyabinsk Ministry for Agriculture.

Fruitful ideas

It depends on the spring sowing work how the agrarians will live through the next year which is why the money for the sowing season 2010 has been found and at the moment the agro companies are almost 100% ready to carry out the works. However, there is no point talking about any development. "Due to the difficult financial condition of agro companies in the Sverdlovsk Oblast the volumes of organic fertilisation have dropped. As soon as the State stopped the reimbursement of the spending for the lime treatment and phosphorite application this has led to the cessation of work on the increase of the fertility of the soil", Ilya Bondarev, the regional Minister for Agriculture, told RusBusinessNews.

It is absolutely vital for the agroindustrial companies to take into account the negative experience of 2009-2010 and start to seriously raise the economic effectiveness of the production of grain. For instance, according to Aleksandr Zavalishchin, the First Deputy Minister for Agriculture of the Chelyabinsk Oblast, agrarians have to change the structure of areas under crops if they want to sell the harvested crops at a profit. "Due to the low prices for the soft wheat we have to sow more cultures which are in demand in the market. And the grain grown but not demanded has to be processed and used for the needs of cattle breeders", the official explained. Sabet Kanatpayev, the Director of the Chelyabinsk Sovkhoz Bredinskiy Ltd, agrees with him. According to the 2009 results he managed to sell soft wheat with only 60% profitability and he is convinced that the foundation of the successful plant breeding is in the correct choice of types of products, careful control of fuel spending for field work and adhering to the production technology.

Moreover, it is necessary to develop alternative ways for the short term funding of agroindustrial complex during the preparation work for the sowing season. In the Tyumen Oblast the processing enterprises and machinery suppliers give loans to the agrarians. "For the harvest of 2010 they are planning to allocate 5,003 millions to the producers as ready cash and material resources. This is 29% of the sum which the agrarians planned to attract from non-budgetary sources for the preparation of the sowing season", Vladimir Kovin, the Manager of the Agroindustrial Complex Department of the Tyumen Oblast, told RusBusinessNews.

Moreover, according to the Plenipotentiary Envoy of the Russian President in the Urals Federal District Nikolay Vinnichenko, by the summer 2010 a Urals Regional Grain Company will be established in the region. It is expected that it will not only lobby the interests of the Urals agrarians at the federal level, but that it will serve as the basis for the establishment of the stabilisation fund for the support of the agroindustrial complex. "We have to consolidate the efforts of the producers through the Urals Grain Company. This structure will be able to stabilise the market using various measures. For instance, it will be able to support the agrarians using cash funds formed by the money allocated by the subjects of the Federation", stressed the Envoy.

Yevghenia Yeryomina